Portfolio optimization of electricity markets participation using forecasting error in risk formulation

Faia, R.; Pinto, Tiago; Vale, Zita; Corchado, Juan Manuel

http://hdl.handle.net/10400.22/18059

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Authors

Faia, R.

Pinto, Tiago

Vale, Zita

Corchado, Juan Manuel

Abstract(s)

Recent changes in the energy sector are increasing the importance of portfolio optimization for market participation. Although the portfolio optimization problem is most popular in finance and economics, it is only recently being subject of study and application in electricity markets. Risk modeling in this domain is, however, being addressed as in the classic portfolio optimization problem, where investment diversity is the adopted measure to mitigate risk. The increasing unpredictability of market prices as reflection of the renewable generation variability brings a new dimension to risk formulation, as market participation risk should consider the prices variation in each market. This paper thereby proposes a new portfolio optimization model, considering a new approach for risk management. The problem of electricity allocation between different markets is formulated as a classic portfolio optimization problem considering market prices forecast error as part of the risk asset. Dealing with a multi-objective problem leads to a heavy computational burden, and for this reason a particle swarm optimization-based method is applied. A case study based on real data from the Iberian electricity market demonstrates the advantages of the proposed approach to increase market players’ profits while minimizing the market participation risk.